Bear Attempts to Put Departing Reps on Hiatus; ‘Garden leave’ Provisions Have Left Brokers on the Sidelines

Investment News - Dan Jamieson
April 21, 2008

Bear Stearns & Co. Inc. wants departing brokers to take a vacation. The New York-based firm has filed suit against several brokers who left in the wake of its near-collapse last month. Bear Stearns is attempting to enforce noncompete and confidentiality agreements.

While such suits aren’t unusual, some of the more senior and institutional Bear Stearns representatives have signed “garden leave” provisions that have given the disputes a new twist.

The provisions require brokers to sit idly at the firm for several months before jumping to a competitor. Brokers are paid only a base salary during the period.

Last month, one Bear Stearns rep in New York who plans to go to Lehman Brothers Holdings Inc., Kym Arnone, was prohibited by a New York court from communicating with clients while waiting out a 90-day garden leave period. Lehman is based in New York.

The case is pending industry arbitration.

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Bear Stearns sued Ms. Arnone after she told clients that she would be joining Lehman, according to a March 31 court order by Judge Sheila Abdus-Salaam of the New York State Supreme Court in Manhattan.

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In a separate case against Boston-based broker Douglas Sharon, Judge Nathaniel Gorton of the U.S. District Court for the District of Massachusetts in Boston last month temporarily prevented the rep from moving to New York-based Morgan Stanley after he resigned from Bear Stearns on March 17.

Mr. Gorton also prohibited Mr. Sharon from speaking with clients.

However, Mr. Gorton later ruled that the garden leave contract was unenforceable, and he allowed Mr. Sharon to move to Morgan Stanley.

The provision would require Mr. Sharon “to continue an at-will employment relationship against his will,” Mr. Gorton wrote in an order this month.

The latest order also freed Mr. Sharon to communicate again with clients and said that Bear Stearns had little evidence that he had engaged in other alleged improper behavior.

Bear Stearns case against Mr. Sharon is awaiting an arbitration hearing.

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Garden leave provisions, commonly used by employers in the United Kingdom, typically offer employees full pay while they sit on the sidelines. But in Bear Stearns’ case, it appears that the provision could force departing reps to take huge cuts in pay for several months.

For example, Mr. Sharon had a base salary or draw against production of $250,000 a year, just 10% of his total compensation, Mr. Gorton said.

According to court papers filed by Bear Stearns, Mr. Sharon was a 20- year Bear Stearns employee and former branch manager who produced $5.1 million in annual gross.

Base pay for Wall Streeters is usually a fraction of total pay, said Larry Moy, an employment lawyer and partner at Outten Golden LLP in New York. Together with other restrictions, garden leave provisions are “often quite punitive,” he said.

Charges fly

In Mr. Sharon’s and other cases, some details of the chaotic March 15 weekend at Bear Stearns have emerged. That is when the firm’s brokers scrambled to collect client data and talk to customers after the pending collapse of the firm came to light on March 14.

Mr. Sharon said in an affidavit that he didn’t have to solicit clients to leave, as Bear Stearns alleged, because clients were “desperate” to get their assets out of the firm.

The broker said he heard from the Bear Stearns cash desk that on March 14 clients had cash withdrawal requests totaling $12 billion, but the firm had only $5 billion available.

Mr. Sharon’s clients by themselves wanted to withdraw $100 million.

Bear Stearns has also used computer records and surveillance tapes in trying to persuade courts that its reps improperly took client records.

In one case against Los Angeles-based rep Graham O’Kelly, who left for Morgan Stanley on March 20, Bear’s Los Angeles branch manager, John Loftus, said that the firm’s computer records indicated that Mr. O’Kelly had printed “reams of paper.” But Mr. O’Kelly, in an affidavit, said that “virtually everyone in the [Los Angeles] office was printing information in order to protect clients.”

Local management, in fact, encouraged it and even “provided us with extra printer toner,” he said.

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Separately, Bear Stearns has cases pending against at least six more brokers in New York.